UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31,1995
Commission File Number: 0-3713
NATIONAL COMPUTER SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0850527
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11000 Prairie Lakes Drive
Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612)829-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
The number of shares of common stock, par value $.03 per share,outstanding
on August 31, 1995, was 15,569,650.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months
Ended July 31,
----------------
1995 1994
---- ----
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $72,454 $63,699
Maintenance and support 15,988 16,432
------- -------
Total revenues 88,442 80,131
COST OF REVENUES
Cost of sales 44,268 37,850
Cost of maintenance and support 10,217 11,116
------- -------
Gross margin 33,957 31,165
OPERATING EXPENSES
Sales and marketing 10,931 10,438
Research and development 3,421 2,620
General and administrative 9,884 9,505
------- -------
INCOME FROM OPERATIONS 9,721 8,602
Interest expense 918 821
Other (income) expense, net (476) 31
------- -------
INCOME BEFORE INCOME TAXES 9,279 7,750
Income tax provision 3,635 3,035
------- -------
NET INCOME $ 5,644 $ 4,715
======= =======
NET INCOME PER SHARE $ .36 $ .31
AVERAGE SHARES OUTSTANDING 15,728 15,074
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Six Months
Ended July 31,
----------------
1995 1994
---- ----
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $131,012 $116,668
Maintenance and support 31,727 32,213
------- -------
Total revenues 162,739 148,881
COST OF REVENUES
Cost of sales 79,069 67,972
Cost of maintenance and support 20,599 22,663
------- -------
Gross margin 63,071 58,246
OPERATING EXPENSES
Sales and marketing 21,867 21,818
Research and development 7,138 5,542
General and administrative 18,985 18,493
------- -------
INCOME FROM OPERATIONS 15,081 12,393
Interest expense 1,972 1,550
Other (income) expense, net (50) (97)
------- -------
INCOME BEFORE INCOME TAXES 13,159 10,940
Income tax provision 5,150 4,275
------- -------
NET INCOME $ 8,009 $ 6,665
======= =======
NET INCOME PER SHARE $ .51 $ .44
AVERAGE SHARES OUTSTANDING 15,618 15,068
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
1995 1995
-------- -----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,776 $ 1,195
Receivables:
Trade 60,372 77,209
Other 988 1,940
-------- --------
Total receivables 61,360 79,149
Inventories:
Finished products 7,370 6,408
Scoring services and work in process 11,516 8,974
Raw materials and purchased parts 4,565 5,073
-------- --------
Total inventories 23,451 20,455
Prepaid expenses and other 8,520 9,925
-------- --------
TOTAL CURRENT ASSETS 95,107 110,724
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 49,371 48,202
Machinery and equipment 104,235 101,336
Rotable service parts 8,985 9,256
Equipment held for lease 7,704 7,583
Accumulated depreciation (87,250) (83,648)
-------- --------
Net property, plant and equipment 83,045 82,729
OTHER ASSETS
Acquired and internally developed
software products 25,380 27,234
Non-current receivables, investments
and other assets 16,866 17,027
Goodwill 2,731 3,043
-------- --------
Total other assets 44,977 47,304
-------- --------
TOTAL ASSETS $223,129 $240,757
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
1995 1995
----------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 6,283 $ 5,212
Accounts payable 12,753 20,655
Accrued expenses 24,616 29,495
Deferred income 19,344 18,645
Income taxes 2,838 1,103
-------- --------
TOTAL CURRENT LIABILITIES 65,834 75,110
DEFERRED INCOME TAXES 7,114 7,211
LONG-TERM DEBT -- less current maturities 29,783 45,313
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,551 and 15,310 shares,
respectively 467 459
Paid-in capital 7,192 3,795
Retained earnings 118,866 114,546
Deferred compensation (6,127) (5,677)
-------- --------
Total stockholders' equity 120,398 113,123
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $223,129 $240,757
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 31,
-----------------
1995 1994
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(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,009 $ 6,665
Depreciation, amortization and other
noncash expenses 15,095 11,761
Provision for deferred income taxes (97) -
Changes in operating assets and liabilities:
Decrease in accounts receivable 18,035 2,937
Increase in inventory and other
current assets (2,687) (1,110)
Decrease in accounts payable and
accrued expenses (10,872) (8,609)
Increase in deferred income 699 1,531
------- -------
Net cash provided by
operating activities 28,182 13,175
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (8,585) (12,385)
Capitalized software products (2,221) (3,209)
Other - net (2,320) (1,454)
------- -------
Net cash used in investing activities (13,126) (17,048)
------- -------
FINANCING ACTIVITIES
Net increase (decrease) in revolving
credit borrowing (14,600) 4,700
Net proceeds of other borrowings 1,141 1,161
Issuance of common stock, net 1,755 230
Dividends paid (2,771) (2,699)
------- -------
Net cash provided (used)
by financing activities (14,475) 3,392
------- -------
Increase (decrease) in cash 581 (481)
CASH - beginning of period 1,195 1,724
------- -------
CASH - end of period $ 1,776 $ 1,243
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. The results of operations
for the period ended July 31, 1995, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1996.
Note B - Earnings per share for the respective operating periods are computed
based on average shares outstanding and common stock equivalents.
Note C - The Company has 10,000,000 shares of $.01 par value Preferred Stock
authorized of which none is outstanding. 50,000,000 shares of $.03 par value
Common Stock are authorized.
Note D - The Company has received a claim from a customer for expenses, alleged
loan defaults, and other damages related to performance under a loan processing
and servicing contract. The Company has tendered the defense of this claim to
its insurer and the insurer has accepted that defense subject to a reservation
of rights. The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, the Company believes that
any such claim would be substantially covered by insurance and would not have a
material effect on the Company's financial position.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is an information services company serving the
education, business, government, health care and banking and financial markets.
The Company's 1994 Annual Report contains descriptions of its activities in each
of these markets.
Recap of 1995 Results
For the quarter ended July 31, 1995, total revenues were up by $8.3 million or
10.4% from the quarter ended July 31, 1994. Net income was up 19.7% to $5.6
million, or $.36 per share. Sales to Business and Government customers increased
significantly as the Company's focus on certain key application areas such as
quality measurement and human resources produced positive results. The Company's
Education business also had improved results in the quarter, with growth in the
test processing and administrative software businesses. The Financial Systems
business also reported improved profitability over the 1994 period.
Total revenues for the six months ended July 31, 1995, increased by $13.9
million or 9.3% over the same period of the prior year. Net income rose 20.2% to
$8.0 million or $.51 per share. The year-to-date increases are the result of the
same business factors noted above. A more detailed discussion of the various
income statement items follows.
Revenues
Total revenues for the quarter ended July 31, 1995 were up 10.4% to $88.4
million from $80.1 million in the comparable 1994 quarter. On a year-to-date
basis, revenues were up 9.3% to $162.7 million from $148.9 million in the prior
year. Total second quarter and year-to-date revenues as compared to the prior
year, by the Company's major business areas, were as follows:
Second Quarter Year-to-Date
Education + 18% + 16%
Business, Government
Health Care and Other + 5% + 6%
Banking and Financial - 1% --
Total revenues for Education were up for both the quarter and year-to-date
periods as a result of favorable timing and higher volumes of student financial
aid and educational assessment processing at the Company's Iowa City service
center. In addition, Education revenues were positively impacted by higher
software licensing revenues from administrative software. Total revenues for
Business and Government were also up for both periods as higher forms and
proprietary hardware sales were partially offset by lower third-party
maintenance revenues. Total revenues in the Banking and Financial market were
essentially flat for the three and six-month periods ended July 31, 1995, as
compared to the same prior year periods. Higher software licensing and support
revenues generated from a fiscal 1994 third quarter acquisition of an
international private banking software business were negated by lower domestic
software and hardware revenues. The revenue increases for the three and
six-month periods ended July 31, 1995, are not necessarily indicative of the
revenue increases expected for the entire fiscal year ended January 31, 1996.
Cost of Revenues and Gross Margins
For the quarter ended July 31, 1995, the Company's overall gross margin declined
slightly to 38.4% from 38.9% for the same period in the prior year. The gross
margin on net sales revenue declined by 1.7 percentage points from the same
period in fiscal 1994. The quarter-to-quarter decline was principally the result
of lower processing margins in Education's Iowa City service center and the
greater complement of this processing business in the Company's total revenues.
Gross margins on maintenance and support revenues improved by 3.7 percentage
points in the second quarter as compared to the prior year quarter as a result
of improved hardware maintenance margins in Business and Government and improved
software support margins across the Company.
For the six months ended July 31, 1995, the Company's overall gross margin
declined slightly from a year ago. This decline is principally related to the
factors cited above.
Operating Expenses
Sales and marketing expenses increased $.5 million or 4.7% in the quarter ended
July 31, 1995, over the quarter ended July 31, 1994. For the six months ended
July 31, 1995, sales and marketing expenses were essentially flat year-to-year.
As a percentage of revenue, however, sales and marketing expenses have declined
by .7 percentage points and 1.2 percentage points, respectively, for the three
and six-month periods ended July 31, 1995, as compared to the same prior year
periods. For the remainder of fiscal 1995, the Company expects sales and
marketing expenses to be slightly higher than fiscal 1994.
Research and development costs increased by $.8 million for the quarter ended
July 31, 1995, over the year earlier quarter. For the six months ended July 31,
1995, research and development expenses were up $1.6 million over the same
period of 1994. These increases related principally to Banking and Financial
software and enhancements to the Company's scanning and imaging technology.
These expenses are likely to continue at higher levels than the previous year as
the Company expects a higher portion of software product development costs to be
non-capital in nature in fiscal 1995.
General and administrative expenses increased by $.4 million and $.5 million,
respectively, in the three and six-month periods ended July 31, 1995, from the
comparable prior year periods. For fiscal 1995, these expenses are expected to
be comparable or slightly higher than the previous year.
Non-operating Expenses
Interest expense increased modestly for the quarter ended July 31, 1995, as
compared to the prior year quarter, as a result of higher interest rates. For
the six months ended July 31, 1995, interest expense increased by $.4 million,
from the comparable prior year period. This increase is almost equally the
result of higher aggregate borrowing levels and higher interest rates.
Other income and expense, net, for the quarter ended July 31, 1995, compares
favorably to the respective prior year period primarily due to foreign currency
gains in the current quarter. Other income and expense, net, was negligible for
both the six- month periods ended July 31, 1995, and July 31, 1994.
Provision for Income Taxes
The effective income tax rate of 39.1% for the six months ended July 31, 1995,
was equal to the effective rate applied for the same period in the prior year.
Liquidity and Capital Resources
For the six-month period ended July 31, 1995, the Company generated $28.2
million of cash flow from operating activities. This compares favorably to the
corresponding prior year period primarily as a result of improved collections of
trade receivables. Cash provided from operations and cash on hand were used to
fund investments in property, plant and equipment and product software, as well
as reduce the Company's revolving credit borrowings. It is anticipated that the
Company's revolving credit borrowings and other borrowings will, overall, be
relatively constant or decline slightly for the remainder of fiscal 1995. Funds
to be generated from operations and funds available from the Company's existing
revolving credit facility are expected to be adequate to meet current cash
requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule.
(b) There were no reports on Form 8-K filed for the three months ended July
31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
/s/ Jeffrey W. Taylor
---------------------------
Jeffrey W. Taylor
Vice President and
Chief Financial Officer
Dated: September 13, 1995
<PAGE>
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
For the quarterly period ended July 31, 1995
---------------
EXHIBIT INDEX
---------------
Exhibit 27. Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for National Computer Systems, Inc. and Subsidiaries, for
the quarterly period ended July 31, 1995, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-31-1995
<CASH> 1,776
<SECURITIES> 0
<RECEIVABLES> 60,372
<ALLOWANCES> 0
<INVENTORY> 23,451
<CURRENT-ASSETS> 95,107
<PP&E> 170,295
<DEPRECIATION> (87,250)
<TOTAL-ASSETS> 223,129
<CURRENT-LIABILITIES> 65,834
<BONDS> 29,783
<COMMON> 467
0
0
<OTHER-SE> 119,931
<TOTAL-LIABILITY-AND-EQUITY> 223,129
<SALES> 72,454
<TOTAL-REVENUES> 88,442
<CGS> 44,268
<TOTAL-COSTS> 54,485
<OTHER-EXPENSES> 24,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 918
<INCOME-PRETAX> 9,279
<INCOME-TAX> 3,635
<INCOME-CONTINUING> 5,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,644
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
